Google Fiber: A lesson on free market failure

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Conservative members of the American federal government have been praising Google Fiber as a “free market” success story. Notably, FCC Commissioner Ajit Pai stated that it shows what can happen when states and local communities adopt broadband-friendly policies and that others should follow Kansas City’s model.

What he means by broadband-friendly policies is deregulation. Broadly speaking, American conservatives are generally in favor of massive deregulation in order to reduce the roles that the government takes on. The belief is that with deregulation, the free market will quickly encourage the private sector to act to provide better products and services than if the government had acted to do so.

This logic is fundamentally flawed, though. Such a system only works if all of the following conditions are true: the barriers to entry are low; the costs to maintain are low; the demand is high; and the supply is high. However, only one of those conditions is true, and that is the high demand requirement. Aside from barriers to entry, all of the other conditions tend to fix themselves over time.

Conservatives may be right about requiring deregulation in order to lower the barriers of entry. Most cities and counties make it very difficult to enter and deploy a new broadband network. There are often a lot of rules about where to construct, deploy, and (if necessary) bury network lines. There are rules on who must be wired up first, and who must get cheap or free access (normally public facilities like libraries and schools). There are rules on where network hubs can be placed. And so on and so forth.

The rules are complex and difficult to navigate. Because of this, franchise agreements are almost universally used in order to simplify this. Verizon FiOS and Google Fiber both operate broadband in markets under the auspices of a franchise agreement to indicate what the responsibilities are for both the company and the community. Sounds good, right?

Unfortunately, franchise agreements are a double-edged sword. After the (often rigorous) negotiations and the signing of the agreements, the companies are normally assured monopolistic control over a market (even though the agreements specifically state that it is a non-exclusive agreement). This is in exchange for partial subsidy by the city to accelerate deployment. While Google’s was unusually generous, it is not unusual for network providers like Verizon Communications and Google to receive some extraordinary benefits in exchange for providing services. While these agreements do include coverage requirements (particularly in cities with plenty of low income households), these agreements also are not easy to terminate in the event of non-compliance or unsatisfactory compliance. Additionally, these agreements last for ten years or more, which is more than enough time to entrench the brand and quality of service in the area.

As a result, when the agreement expires, the community has no choice but to renew because no one else will step up and take over if the community wants someone better. A good example of this is Cable One in Columbus, Mississippi. Aside from the recent loss of cable services due to a component in the network failing, its low usage caps and poor performance in general has left the city feeling less than charitable to the company. The city of Columbus, Mississippi signed the franchise agreement with Cable One back in June 1984. The agreement is set to expire in 2014. They have under two years to find someone to take over, but no one is answering the call, so far.

What is likely needed is not deregulation, but reworked (and potentially simplified) regulation. A lot of the regulation in place today applies to one kind of company or another, and some apply to both. At the same time, many regulations in place are intended for older types of networks like copper based digital subscriber line (DSL) broadband internet services. Fiber and coaxial cable systems either have little regulation or a lot of outdated regulation to contend with. Both situations are equally bad. With little regulation, you see regular price hikes, making it harder to afford higher quality services. With a lot of outdated regulation, you get slower deployment and upgrade cycles due to all the extra work required to comply.

Something needs to be done about this mess, but it is doubtful that Congress or local governments will realize that something needs to be done to improve it. Instead, they’ll continue to sip the wine provided by AT&T/Verizon and make things worse for everyone.

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Michael Garrett

This story is nothing but political and had very little to do with Google Fiber. Almost thought this was the New York Times for a second.

Jasdeep Singh

Yes, this has everything to do with google fiber. Because barrier to entry and cost of maintenance is high. So while a 250 billion dollar company can churn out these flashy services, small business owner simply can’t succeed. Rather than making partisan comment why not point out particular shortcoming of the article.

Michael Garrett

The title suggests that Google Fiber was a failure when it’s actually doing quite well (1). The article then goes out to convince the reader that deregulation will be bad and that only regulation will save us from the big bad companies. It only addresses Google because it has the capital to start a new ISP but a pool of motivated investors could do the same thing.

My political leanings are not liberal but I don’t appreciate politics in my tech blogs.

I wasn’t aware that ethical behavior was a uniquely liberal concept. The point of this article is that conventional regulation and the complexity of buildouts has led to stagnation and poor management from companies that have no incentive to do better.

In the majority of the US, consumers have 1-2 potential broadband providers. In some cases, they have just one. Major markets with millions of subscribers are functional duopolies, with entrenched service agreements.

You can call that a failure of regulation or a failure of the free market. What’s less disputable is that the companies in question have taken advantage of the situation to *stop* pushing the envelope. Verizon stopped rolling out FiOS to new areas in 2010. AT&T has slowed the pace of U-Verse rollouts. US broadband speeds and pricing remain solidly mediocre compared to the rest of the developed world.

Michael Garrett

Exactly my point. Remove the first paragraph and title and this would be a fine article on the stagnation of innovation in the broadband space. Beyond that, this article really has nothing specific to how Google has been a free market failure.
My whole argument has been that this piece is giving general information about a problem we all know exists but is trying to tie Google to it unnecessarily. What have they done to perpetuate the cycle of poor customer service and high prices? Why are they a ‘free market failure’?

http://pharaohtechblog.blogspot.com/ Conan Kudo (ニール・ゴンパ)

Ahh, but here’s the issue. The United States did actually largely deregulate telecom in 1996 based on the theory that deregulation would allow for the free market to advance telecom services beyond our wildest dreams.

Six years later, DSL still tops out at T2 speeds even for businesses. T3 and higher is a dream. The cable companies consolidated drastically (due to lack of regulation overall in this area) in order to deal with the rising costs of retaining TV channels and to offer larger networks to offer higher broadband speeds at much higher prices. DOCSIS technically can support fiber speeds, but the cost of doing so is the total elimination of traditional TV channel carriers over the line. The cable company would have to deploy IPTV instead, which they are extremely hesitant to do.

Infrastructure is the one area where sane government oversight will always be required.

http://www.facebook.com/people/John-Moser/100002719228612 John Moser

Ah, but here’s the real issue. The problems you spout are a result of government created monopolies. The cell phone industry doesn’t have that problem(as a result of the deregulation you decry) and now almost everyone has one and they work almost everywhere. Statists love to attack the monopoly after going to great lengths to create them. If you had your way, we would still be using dial phones(leased from the government mandated phone company).

http://pharaohtechblog.blogspot.com/ Conan Kudo (ニール・ゴンパ)

Err, sorry. Competition was ensured in the cell phone industry through careful regulation. I don’t decry deregulation, as long as it makes sense. The wireline telecom industry has largely failed to deliver on its promises after the 1996 deregulation.

LR C

Name the “thoughtful” regulations that ensured competition in the cell phone industry? Only frequency regulations make any sense, otherwise you’re utterly wrong.

LR C

The US didn’t deregulate the telecom industry at the state or local level and most federal regulation remains in place. Ever here of the FCC?
5 commissioners chosen not for their wise erudite ways or proven technical prowess, but for their political adherence to the current President’s agenda decide on policy for a nation of 300 million people representing 25% of the world’s GDP. That’s not “free market” in the least bit. That’s communistic or fascistic control over markets aka socialism, progressivism, etc.
What these arguments fail to account for is there isn’t any real deregulation going on. One will often hear about the deregulation of an industry, but “de” is a bad root word. It has several meanings only one of which is removal in whole. There hasn’t ever been a complete deregulation, just a removal of some rules or restrictions.
Anyone who’s ever played or designed a game knows that tweaking one rule can skew the game completely. Free markets are ideal and they work. Look at the American railroad industry in the 19th century or the oil industry under Rockefeller’s Standard Oil. The common narrative taught in government schools is that this period of unbridled capitalism was a disaster and needed the “progresive’ movement. Reality is exactly the opposite.
We need to carefully distinguish between political entrepreneurs and market entrepreneurs. Political entrepreneurs are our moder crony capitalists. They use their lobbying, money and political influence to pass laws or influence regulators in their behalf to stifle competition. Market entrepreneurs don’t. Take a look at the above examples in railroads and petroleum and you’ll see the difference.

Suarez from the car park…

umm, the railroads relied on confiscation of land, lots of murder and theft.

Should we simply tell people to go for it and build any structures they want wherever they want?

Do you really see a nice clean competitive path to low prices rather than single player domination or cartel like reality?

I would have to call you idealistic and naive.

http://twitter.com/darylgriffiths Daryl Griffiths

+1 for “I don’t appreciate politics in my tech blogs”.
Editors should be aware that they risk alienating a large number of otherwise loyal readers / followers by allowing party-political point scoring.

http://twitter.com/RobertOstrowsk1 Robert Ostrowski

The author states that this is a free market failure but then goes on to explain that the problem’s cause is a non-free market (although he doesn’t identify it as such.) A company being granted “monopolistic control over a market” and “in exchange for partial subsidy by the city to accelerate deployment;” monopolies of governmental force and government subsidies are not found in free markets.

It’s also categorically false that free markets only work when cost barriers are low, supply is high, and demand is high. What about SpaceX and Virgin Galactic? More in the vein of this article, what about MCI? Even despite a sea of existing regulation and an insanely high cost barrier, they went into business and ended up creating some truly great and innovative things such as microwave communication relays,single mode fiber-optic backbone, ventures into satellite communications, etc.

Free markets breed competition which breeds innovation. Is every venture successful? Absolutely not, but that’s not a bad thing. Failure is just as much an important part of the free market as success. Regulation, however, breeds only stagnation and more regulation, all the while evading the fact that innovation rarely occurs, and certainly does not flourish, under compulsion. You can see the results today of the “too big to fail” heavily government regulated and subsidized companies of the so-called “free” market. How could the cure for poison be more poison?

CWeb

Thanks for typing what I was too lazy to write!

Suarez from the car park…

ok, so what happens when a provider refuses to service an uneconomic area (as in rural areas of the UK)?

Do you just say, “tough, it’s the market” or do you intervene and force/subsidise/bribe the providers into getting it done.

(the govt here has taken tv license payers money and given it to the providers to plug this hole much to the amusement of the poverty stricken network providers).

Yeah…what we need is more gov’t involvement. They do such an amazing job with the unspeakably complex task of DELIVERING MAIL to the tune of >$5 billion loss annually. We need LOTS more of that kinda action. Please, PLEASE Momma Gov’t save the interwebs from da ebil “conservatives”! Leftist facists…engage!

Joel Hruska

Stop trolling. The USPS’ problems stem from being forced to *prefund* “75 years’ worth of future health care benefit payments to retirees within a ten-year time span – a requirement to which no other government organization is subject. Thus, in addition to the weak economy and the diversion of mail to electronic means, the mandates of PAEA have had a considerable impact on Postal Service finances. As a consequence, it has been charged that the US Postal Service budget crisis of 2011 is, in essence, an artificial one”

Courtesy of Wikipedia.

http://www.facebook.com/people/John-Moser/100002719228612 John Moser

Stop quoting Wikipedia. That’s just dumb.

LR C

So regulators are forcing the USPS out of business?

Neo Cool`

you are correct. I hate how these trolls republicans mess up the goverment and then complain that the goverment can’t get anything right.

Suarez from the car park…

idiot.

http://www.facebook.com/people/John-Moser/100002719228612 John Moser

Article fail. So, what we really need are bigger governments and better monopolies. I’m not convinced.

Nick2000

I am not sure what a lot of you read here. It only says that both too much regulation and too little regulation wrecks things up. Anybody arguing for ZERO regulation is not thinking straight. Maybe you want the companies to negotiate with every single home owner to put wires on their land? Maybe I don’t want them touching my land or even going OVER my land. Wireless companies have a lot less problems in that respect.

LR C

What is regulation in the telecom industry protecting us from? I’m a regulator on the local level and the truth is that existing companies love regulation as it helps them while it drive entrepreneurs away. The ones writing the rules are the individuals and businesses who profit from the rules. What would a completely unregulated telecom market look like? Who would win and who would lose?

Neo Cool`

What is really needed is more regulation and limiting Verizon/ATT control of our representatives. once we have a congress that represent us then we can change the rules to make it easier for competition to emerge and be finally able to break the monopolies we have today. the Author is on the right track and have many good ideas but I think he was not ready for the backlash.

http://www.facebook.com/buddhaflow Sasha Shepherd

Once we have Santa Claus to come deliver our presents, we won’t have to go wait in line at the toy store, either.

Your idea of a congress that actually represents us is equally fanciful. They never have, and never will.

https://www.Best-WorkAtHome.com/ BestWorkAtHome

While there is truth within the article, it is yet clouded by the inaccurate partisan generalization which perpetually divides the issues of American politics to never be resolved. Conservative about spending is good. Liberal about other issues is good too, like how about being liberal about getting public high school graduates able to read and write? Instead of being conservative about those failing statistics? Partisan generalizations are inherently incorrect and are only attractive fodder to knee-jerk TV addicts.

http://twitter.com/rationalrevo R. G. Price

The biggest issue really is that many of the regulations are themselves asked for BY private corporations.

This is the catch 22 that libertarians can never seem to resolve in their heads. I mean Milton Friedman openly acknowledged that regularization generally INCREASE profits for private enterprises that meet them, and he acknowledged that in many cases it is in fact the private enterprises that appeal to government to create said regulations in order give themselves a market advantage.

But then, despite that, even Friedman can’t seem to then acknowledge that such regulations then aren’t really products of “the government”, they are themselves products of private enterprise.

And this is the issue, they want “private enterprise” to be able to influence the government and for the government to be “pro business”, but in allowing private enterprise to influence government you then guarantee the on-going perpetuation of the use of things like regulations and tax loopholes to distort the market in favor of contributing private enterprises.

This is the biggest fallacy of libertarians, the idea that private enterprises WANT a “free market”. NO, they don’t. The objective of every for-profit enterprise is presumably to maximize profits, and you maximize profits by gaining a MARKET ADVANTAGE over your competitors. As such, all for-profit businesses are interested in MANIPULATING the market in their favor, thus they will always seek to appeal to government as one means of tilting things in their favor.

This is the issue with Republicans complaining about the “complexity of the US tax code”, yet most of that complexity is a product of the rich and corporations lobbying law makers to introduce said complexity on their behalf!

The issue is that an individual entity wants to have the law bent in its favor, but when taken on the whole, when hundreds or thousand of entity successfully lobby for the insertion of rules in their favor, the end result is a mess that’s bad for everyone, but make no mistake, the people complaining are the same ones who cause the problems!

And the issue is, that WITHOUT “regulation” of some kind, you don’t end-up with a “free market”, you end up with a market that is manipulated privately, such that the private entities with power purposefully erect barriers to entry, etc.

That’s the issue, the issue is that it’s not in the self-interest of private businesses operate within a “free and fair” market with a “level playing field”, that’s the LAST thing they want. They want distorted markets that distort things in their favor in order to increase profits. They want barriers to entry, they want misinformation, they want restrictions on supply to ensure that demand exceeds supply, etc., etc.

Capitalists don’t actually WANT free markets, that’s the point.

Government regulation should be used to maintain “free market” conditions, and the extent to which it doesn’t, is largely a product not of “government regulators”, but actually fo private industry lobbyists lobbying law makers to manipulate the market in their favor.

U and I corn Co.

What we need is to stop recognizing business as people Corporation=Person , a corporation has no moral value, acts only in its own best interest and has no responsibility to any others . I am speaking as a Whole that is Workers, Management, Share holders, Investors and the like. How can you hold any corporation accountable for anything except financially ? This being said why should any corporation have a say in our government , either through lobby or indirectly advertising for or against politicians, Political causes or any nonspecific corporate causes?

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